Yes, I know I'm probably the last one to this party. I've always wondered people mean when talking about their IRAs or their RRSP, the Canadian version of the IRA. I know it's something I should be paying attention to, but I just don't have the funds, or honestly, lacked the drive to research it. Until now.
After reading through half of "I'll teach you to be rich" (I told you I was a speed reader), I've got a much better understanding. And for those that may not have an IRA account, here’s the quick info:
It is a retirement funding source, just like your 401k. But the similarities end there. While a 401k or similar retirement accounts are funded with pre-tax contributions (meaning that there is no tax taken at the time of the contributions), IRAs are funded with post-tax contributions. For example, if you have $100 for a contribution in any given period, and you have a tax rate of 25%, you could fund your 401k for the full $100 or your IRA for $75.
Taxation is the main difference between all of these methods. With my 401k, I won’t get taxed on the contributions or gains until I start withdrawing. Fees and such apply if I withdraw before age 59.5, but that seems to be the same with all retirement funds.
There are two types of IRA with two different taxation systems: the Traditional IRA and the Roth IRA. The Traditional IRA allows you to make tax-deductible contributions, so you are deferring the taxation until you start withdrawing. With the Roth IRA, you can’t deduct your contributions, so you are paying the full amount of taxes upfront in order to not get taxed when you start withdrawing.
Sorry, I am terrible at explaining things like this, and I don’t want to lecture you, as I am sure too many are already very knowledgeable on this sort of account.
All said and done, I really, REALLY want to open a Roth IRA. I’ve been researching fees, companies, funds and so on. So far, I know there’s a minimum to open most accounts, between $1,000 and $3,000. I know I don’t have that amount handy, and probably won’t be able to come up with it until late spring after taxes are paid for. But it has brought a slew of questions I need to explore, such as: should I pay debt or should I save? How much can I tweak my current debt paying strategy? Should I start saving for other things now, like car down payments and house down payments? The book has brought a lot of things into focus that I had considered minor before, so February should keep me properly amused in the long run as I explore new financial topics!